brokers say sell ?, page-7

UBS report:

Result in-line, capital management in focus

􀂄 Event: Full year result and capital management program
OZL reported a full year financial result largely in-line with UBS-e but slightly below consensus. Underlying NPAT of $398m compares with UBS-e of $410m and consensus of $416m. Reported NPAT of $587m includes the reversal of earlier
asset impairments. Capital management initiatives have been announced, including a 4cps unfranked final dividend (UBS-e 0cps), a 12cps capital return (UBS-e 13cps), a share buy-back up to $200m and a 1:10 share consolidation.

􀂄 Impact: Minor earnings changes, higher D&A & dividend payout ratio Reconciling the result has resulted in minor earnings changes, largely related to higher D&A charges and a higher dividend payout ratio of 55% (UBS-e 45%). The end of June 2011 net cash position (post capital return & excl buy-back) is expected to be $1.05bn down from $1.33bn at end of CY10.

􀂄 Action: Maintain Sell, remains least leveraged to Cu price

We maintain our Sell rating based on valuation. While OZL remains well placed to look for growth opportunities it remains the least leveraged Cu stock in our universe. For every US?25/lb lift to our long term Cu price our NPV increases by less than 5%. At a flat price of $4.50/lb Cu for 2-years our NPV lifts 4%, albeit with a dividend yield of 4.4%. We also believe that at current prices, any buy-back is likely to be value dilutive to shareholders.

􀂄 Valuation: $1.31/sh (DCF, 10% discount rate)
Due largely to lower cash from the capital return, our NPV has been lowered 8% to $1.31/sh. Our target price of $1.50/sh is based on a 40% NPV weighting and a 60% weighting to 5.5x CY11E EV/EBITDA multiple.

CY10 full year result

OZL have reported full year financial results largely in-line with UBS-e, however slightly below consensus. Underlying NPAT of $398.2m compares with UBS-e of $410m however is 4% below consensus. Reported NPAT of $586.9m includes the reversal of earlier asset impairment and the impact of discontinued operations. Capital management initiatives have been announced, including a 4cps unfranked dividend (UBS-e 0cps), a 12cps capital return (UBSe 13cps), a share buy-back up to $200m and 1:10 share consolidation.

The Prominent Hill operation continues to perform well, with an operating EBITDA of $741.5m, up 83% compared to pcp. However, this is the first full year of operations at the mine, so this comparison is not particularly meaningful.

The operating result was largely in-line with expectations, with slight variations the result of higher than forecast depreciation and amortisation charges and higher PPE costs. Operating cash flow was weaker with ?other costs? higher than expected. Capital expenditures associated with sustaining capital, development of the underground Ankata orebody and resource drilling were also higher than forecast.

Cash held at the end of the period was $1334m (UBS-e $1378m) however this will be drawn down with during the coming year after the return of capital and implementation for the share buy-back.

Capital management was the key focus of the result, with a 12cps capital return (equating to nearly $390m), a 4cps unfranked dividend ($129.5m), an on-market share buy-back up to $200m and a 10:1 share consolidation. The record date for the dividend is 23 February 2011, with the proposed capital return and share consolidation needing shareholder approval at the AGM on 18 May 2011. If approved, the record date for entitlement to the capital return is 26 May 2011.

The current dividend payout ratio is around 60% of NPAT from normal operations. We have subsequently increased our future expectations of the dividend payout ratio from 45% to 55%, in-line with the company dividend policy of paying out between 30 ? 60% of NPAT from normal operations.